On July 9th, The Obama administration announced its plans to mandate bundled payments for joint replacement surgery when paid by Medicare. This is the first step in the bundled payment model and it is starting in Indianapolis, Evansville, South Bend and 72 other metropolitan areas.
A bundled payment means that instead of paying the hospital for each component of a procedure, Medicare will pay one bundled payment, which includes all services related to an episode of care and typically includes 90 days of postoperative follow-up and any related complications or readmissions that arise during that period. The price covers all providers involved, including physicians, hospitals, lab work, post-acute providers, etc.
In a bundled payment system, the money paid out to the hospital is determined by how effective the procedure was based on a 90-day period after the procedure. Medicare will set a target and if the cost of the procedure goes beyond the target, it will require a refund from the hospital, while those that come in under the target would be able to keep the difference.
This is a huge change from the fee-for-service model that we are all used to, and bundled pricing will likely apply to other kinds of surgery as well in the future. While fee-for-service might not completely go away (at least not any time soon), it will progressively become a smaller and smaller part of our healthcare’s pay structure as we start to move more and more towards value-based pay models over time.
Pro – Pricing, Transparency & Invoicing
Bundled payments have the power to moderate healthcare costs for patients. Since there is one set cost for a procedure, the pricing is transparent, can easily be known ahead of time, and typically will end up costing less, giving patients peace of mind and allowing them to budget properly.
Bundled payments remove the fragmented invoicing of laboratory tests, radiological examinations, procedures, anesthesia, rehabilitation, home care, etc. Instead, patients receive a single bill, no matter how many providers are involved in the care.
Bundled payments discourage unnecessary medical services as well. As providers work together under a single budget, they are more likely to be efficient and eliminate unnecessary services. In contrast, the fee-for-service model tends to increase medical services that aren’t really necessary since providers are incented to offer more services in return for revenues.
Overall, patients enjoy a decreased financial risk, better cost predictability, lower out-of-pocket expenses, and more simplified payment structures.
Pro – Quality of Care
Bundled payments move the emphasis away from quantity of care (volume) to quality of care (value). Instead of the provider focus being on gaining revenue from each service rendered, they can focus on the overall outcome of the procedure, and since payment is based on the effectiveness of the full episode, outcomes become the focus. In other words, it incentivizes better care to avoid complications.
In addition, physicians play a bigger role in the entire episode, not just the surgery, in order to maintain better quality control and efficiency. This provides more consistency for the patient and more a better relationship with their physician.
Pro – Coordination & Accountability Among Providers
Bundled payments cures the fragmentation issue that currently exists in the healthcare industry and improves the coordination of care between providers. It gives healthcare providers, payers and purchasers an incentive to work together to provide better quality and efficiency.
The 90-day bundle price includes post-discharge care, which can account for up to 50% of inpatient costs and up to 85% of episode cost variability. Surgeons have had quite a lack of control in post-discharge care in the past, and with bundled payments, new care management models are necessary to ensure profitability. Now more than ever, it is even more important to measure outcomes and quality metrics in order to avoid complications and issues that drive up costs.
Pro – Simplification
Bundled payments will change a complicated system into a simple, straight-forward solution that everyone can understand, including patients. It makes it easier to understand hospital pricing. Hospital bills are typically complicated and cause much confusion, and there are often multiple bills received for different aspects of the procedure, making it even more complicated. It is extremely difficult to know what a procedure will cost before going into it, but bundled payments will make knowing the up-front cost transparent, allowing patients to compare providers and plan a budget for their care.
In addition, bundled payments reduce administrative costs for providers since there are less claim submissions and insurance follow ups to process.
Pro or Con – The Risk is on the Provider
Providers can take on huge financial risks with bundled payments depending on how patients comply and on how effective their services are. They are paid a set fee for a period of time instead of being paid for each treatment. This can be a con for providers if they do not have processes in place to provide efficient, quality care and follow up of that care. At the same time, it can be a pro if they are equipped to work together with other providers and to manage care coordination to ensure the best outcomes.
Working with the right providers makes all the difference, so providers who choose only high-quality, trustworthy providers and insurance companies to work with tend to come out on top.
Each patient has their own set of complications that can incur additional costs that would not be included in the bundled payment, so doctors need to change the way they do things to ensure better patient compliance after the procedure since payment is based on how well the patient does. Providers need efficiency, excellent communication, reduced waste and readmissions, and a clear definition of best practices and clinical care paths.
Con – Limitation of Effectiveness
While bundled payments work well for orthopaedic surgery procedures because they have clearly defined episodes of care and expenses, not every procedure will work as well.
Right now, bundled payments could also cause a strain on providers who are not used to working together with other providers, and who don’t have the infrastructure, transparency and technology to do so.
Con – Payment Distribution Difficulties
The distribution of payments to all providers involved in an episode of care can be difficult, especially because each provider’s contribution can be different for each patient.
In most cases, there are more pros to bundled payments than cons and we will likely start seeing these types of payments increasing on various procedures over the next decade. It’s an important step in moving from volume-based care to value-based care.